Earnings Call: Q2 2020

Jul 29, 2020

Quarterly report

Good morning, and welcome to Markel Corporation's Second Quarter 2020 Conference Call. All participants will be in listen only mode. During the call, we will make forward looking statements within the meaning of Private Securities Litigation Reform Act of 1995. They are based on current assumptions and opinions concerning a variety of known and unknown risks. Actual results may differ materially from those contained in or suggested by such forward looking statements. Additional information about factors that could cause actual results to differ materially from those projected in the forward looking statement is included under the captions Risk Factors and Safe Harbor and Cautionary Statements. In our most recent annual report on Form 10 ks and quarterly report on Form 10 Q, We may also discuss certain non GAAP financial measures in the call today. You may find the most directly comparable GAAP measures and reconciliation to GAAP for these measures in our most recent Form 10 Q, which can be found on our Web site at www.markel.com in our Investor Relations section. Please note this event is being recorded. I would now like to turn the conference over to Tom Gayner, Co Chief Executive Officer. Please go ahead. Thank you so much. Good morning, and welcome to the Markel Corporation Second Quarter Conference Call. This is Tom Gayner, and I'm joined today as usual by my Co CEO, Richie Witt as well as our CFO, Jeremy Noble. That may be the last time we get to use the word usual in this call. There doesn't seem to be much that would fall into the camp of usual these days. In fact, I've commented for the last several months that there is an unprecedented use of the word unprecedented. So far in 2020, unprecedented strikes me as the right word to use. I look forward to the day it becomes an overused cliche, but I don't think we're there yet. Despite the unprecedented conditions that we and everyone else face, we've got good news to report to you this morning. Across Markel, in every business and for every customer, our people exhibited unusual and spectacular adaptability and dedication to serve our customers and each other. Our 2nd quarter results with meaningful growth and profitability in each of the three engines of insurance, investments and ventures reflect their efforts. All of the associates of Markel worked unbelievably hard and with great dedication and creativity to find a way forward. Speaking for Richie and Jeremy, I want to extend our thanks to our dedicated associates and the way in which the people of Markel have adapted and persisted to serve our customers amidst the unprecedented conditions triggered by the coronavirus. Now while much of today's call will focus on financial measurements and the effects of COVID-nineteen, I want to take a moment to also address another virus we're facing as a society, namely the virus of racism. Let me be clear. We explicitly reject racism and discrimination. We are fully committed to the dignity and worth of each and every individual. During the last few months, Richie and I had the opportunity to listen to many of our associates and hear their voices and stories in new ways. We are listening and learning. I think the difficult conversations are having a very positive effect. We're confronting issues and problems that we haven't faced before in such a head on way. The honesty and openness is refreshing and I think it gives us all a chance to learn in a new way and to make real progress. We mean the words of the Markel style. Those words include fairness in all our dealings and providing an atmosphere in which people can reach their personal potential. We cite those core beliefs because they are crucial components behind another statement in this style, namely the quest to find a better way to do things, count on our consistent commitment to these ideals. At this point, let me return to the financial reports in the Q2. Jeremy will provide you with an update on the numbers and then Richie will update you on our insurance and insurance linked securities operations. I will then follow with comments on our investments and ventures operations. After that, we look forward to answering your questions. Jeremy? Thank you, Tom, and good morning, everyone. Our underwriting, investing in Markel Ventures results for the first half of twenty twenty were meaningfully impacted by the effects of the COVID-nineteen pandemic. But encouragingly, we saw positive contributions from each of our 3 engines during the Q2. While COVID-nineteen has and likely will continue to influence both the asset and liability sides of our balance sheet, our financial condition was strong at the end of the second quarter and we are well positioned to take advantage of opportunities that are being presented within the specialty insurance marketplace. Looking at our underwriting results, gross written premiums were $3,700,000,000 for the first half of twenty twenty compared to $3,300,000,000 in 20 19, an increase of 12%. This increase was due almost entirely to our insurance segment, which reported gross written premiums of $3,000,000,000 an increase of 16% compared to 2019. This growth related primarily to increased writings within our professional liability, general liability, marine and energy and personal lines product lines. Gross written premium within our Reinsurance segment was consistent with 2019 at roughly $740,000,000 Year to date retention of gross written premiums held constant at 84% in both 2020 2019. Earned premiums increased 12 percent to $2,700,000,000 in 2020, primarily due to higher written premium volume in our insurance segment. Our consolidated combined ratio for the 1st 6 months of 2020 was a 103 compared to a 95 in 2019. For the Q2 of 2020, we reported an 88% combined ratio compared to a 95% a year ago. As we discussed a quarter ago, we recognized $325,000,000 of pre tax net losses and loss adjustment expenses during the Q1 for those policies and contracts where COVID-nineteen was identified as approximate cause of loss. There were no changes in our loss estimates during the Q2. These COVID-nineteen losses increased our consolidated combined ratio for the 1st 6 months of 2020 by 12 points. Our initial estimates of losses directly attributable to COVID-nineteen at the end of March reflected limited claims reporting. However, after considering the additional data gathered through increased claims reporting activity in the Q2, while continuing to monitor actual levels of disruption caused by the pandemic, there were no significant changes in our assumptions during the Q2. As a reminder, our losses from COVID-nineteen are primarily attributed to business written within our international insurance operations and are primarily associated with coverages for event cancellation and business interruption losses and policies where no specific pandemic exclusions exist. Due to the inherent uncertainty associated with our assumptions surrounding COVID-nineteen, which among other things include assumptions related to coverages, liability, reinsurance protection, duration and loss mitigation factors, as well as the fact that the economic impacts of the pandemic continue to evolve, our estimates may be subject to a wide range of variability. As the overall effects of the pandemic continue to evolve, we expect losses indirectly related to COVID-nineteen pandemic and associated with a broader range of coverages are likely to emerge within our professional liability, trade credit and workers' compensation product lines, among others, including our reinsurance product lines. To date, we have not seen significant evidence of incurred losses increasing for these secondary exposures and no explicit provision was made for indirect COVID-nineteen losses in the Q2. It is worth noting that any increase in exposure associated with indirect COVID-nineteen losses will at least be partially offset by the benefits of an improving pricing environment. With regards to prior year loss reserve development, consistent with our reserving philosophy, prior year loss reserves developed favorably by $268,000,000 in the first half of twenty twenty compared to a favorable prior year development of $189,000,000 in 2019. Turning to our investment results. As I've mentioned in prior calls, given our long term focus, variability in the timing of investment gains and losses is to be expected. We continue to see volatility in the equity markets in the Q2 related to the economic uncertainty associated with the COVID-nineteen pandemic. Following the significant declines in the fair value of our equity portfolio during the Q1, we saw meaningful recoveries in the 2nd quarter. Net investment losses for the first half of twenty twenty were $770,000,000 compared to net investment gains of $1,000,000,000 last year, a year over year decline of $1,800,000,000 With regards to net investment income, we reported $184,000,000 in the first half of twenty twenty compared to $226,000,000 in the first half of twenty nineteen. The decline is largely due to lower short term interest rates and lower holdings on fixed maturity securities in 2020. Net unrealized investment gains increased $237,000,000 net of taxes during 2020, reflecting an increase in the fair value of our fixed maturity portfolio resulting from declines in interest rates during the first half of the year. Now I'll cover the results of the Markel Ventures segment. Revenues from Markel Ventures increased to $1,200,000,000 for the first half of twenty twenty compared to $1,100,000,000 last year. Higher revenues from our services businesses were partially offset by lower revenues within our products businesses. Revenues within our services businesses reflect the contributions of revenues from our acquisition of Lansing Building Products, which we completed in late April and acquisition of VSC Fire and Security, which closed during the Q4 of 2019. Within our products businesses, the economic and social disruption caused by COVID-nineteen resulted in decreased demand at many of our businesses during the Q2. EBITDA for Markel Ventures was $173,000,000 for the first half of twenty twenty compared to $160,000,000 last year, reflecting the contributions of Lansing and DFC, partially offset by the impact of lower operating revenues in certain of our businesses. Looking at our consolidated results for the year, our effective tax rate was at 21% for the first half of twenty twenty compared to 22% in 2019. We reported a net loss to common shareholders of $484,000,000 for the first half of twenty twenty compared to net income to common shareholders of $1,100,000,000 a year ago. Driven by the net loss, comprehensive loss to shareholders for the first half of twenty twenty was $260,000,000 compared to comprehensive income of $1,400,000 in 20 19. Finally, I'll make a few comments on cash flows, capital and our balance sheet. Net cash provided by operating activities was $489,000,000 for the first half of twenty twenty compared to $249,000,000 for 20 19. Operating cash flows for 2020 reflected the effects of lower claims settlement activity in both our insurance and reinsurance segments and higher premium collections as we've seen strong growth in our insurance segment over the past several quarters. Invested assets of the holding company were $3,700,000,000 at June 30th compared to $4,000,000,000 at the end of 2019. The decrease in the holding company invested assets was due to funds used to acquire Lansing as well as the decrease in the fair value of our equity portfolio, again related to the impacts of COVID-nineteen, all of which was partially offset by the proceeds from our preferred shares offering. We recognize the importance of liquidity and a strong balance sheet in times of uncertainty. We intend to ensure Markel is resilient for the long term. In addition to the steps we began taking in early March to maintain our ongoing capital and liquidity needs to manage against volatility. In May 2020, we issued $600,000,000 of 6% fixed rate reset non cumulative Series A preferred shares with no par value and a liquidation preference of $1,000 per share for an aggregate net proceeds after expenses of $592,000,000 We continue to maintain a fixed maturity portfolio that provides a high credit quality investment grade securities with an average rating of AA. Our debt to total capital ratio at the end of June was 24%, unchanged from the end of 2019. We have no unsecured senior notes maturing until July of 2022. We believe we are well positioned to meet the ongoing capital liquidity needs, including supporting growth in our insurance operations should we continue to see attractive opportunities in the specialty marketplace. Total shareholders' equity stood at $11,400,000,000 as of the end of June compared to $11,100,000,000 at year end. Much as I said at quarter end, the unprecedented events surrounding COVID-nineteen certainly impacted our year to date results. However, the actions we've taken over the years to build a diverse and resilient organization will help us navigate through the current uncertainty arising from this pandemic. And we are well positioned to continue our efforts to build 1 of the world's great companies. With that, I'll turn it over to Richie to talk more about our insurance businesses. Thanks, Jeremy, and good morning, everyone. The first half twenty twenty has been more eventful and volatile than most full years. We had a fantastic plan in building momentum as we entered 2020. We were executing well until COVID-nineteen hit with its unprecedented cat like fury on a global scale impacting every industry, geography and community. Thanks to our dedicated employees, we took that 1st quarter hit, we quickly adapted and we staged a furious comeback in the Q2. While we recognize there are still significant uncertainties, the 2020 underwriting year is far from lost. We believe to a person that we can make up significant ground over the next 6 months. This will require staying focused on what we can control and preparing as best possible for those things not in our control. As Jeremy mentioned, related to the COVID the direct COVID-nineteen loss reserves, we did not adjust our original $325,000,000 provision for direct COVID-nineteen losses in the Q2. This is largely due to the fact that we have not seen evidence either positive or negative, that would require us to change our estimate. Claims are materializing largely as we estimated and are being reserved and settled in line with our original assumptions. Despite the fact that we made no changes to our original estimate, the ongoing nature and uniqueness of the COVID-nineteen pandemic means the range of potential outcomes is wider than any catastrophe we have ever seen. Now I'll discuss our insurance businesses, which include our underwriting operations, our State National Program Services operations and our insurance linked securities operations. So starting with the insurance segment, gross written premiums for the quarter were up $185,000,000 or 14% compared to the Q2 of 2019. For the 1st 6 months, premiums are up $407,000,000 or 16%. Premium growth for both the quarter and first 6 months was driven by continued organic new business growth and rate increases in our professional liability and general liability products, along with growth this quarter in our marine and energy products. The combined ratio for the insurance segment was 88% for the Q2 of 2020 compared to 95% last year. The 7 point improvement in the combined ratio was driven by more favorable development on prior accident years' loss reserves, a lower expense ratio and a lower current accident year loss ratio. This is a rare insurance trifecta. The increase in favorable development on prior accident year's losses was primarily driven by our property and general liability lines. The combined ratio of the 1st 6 months for the insurance segment was 103 versus 95% for the same period a year ago. The 8 point increase in the combined ratio was driven primarily by $293,000,000 or 13 points of losses attributed to direct COVID-nineteen exposures recorded in the Q1. The impact from COVID losses was partially offset by an increase in favorable development on prior accident year losses, primarily in our professional liability and property product lines. Higher earned premiums for both the quarter and 6 months within our insurance segment had a favorable impact on our expense ratio and an unfavorable impact on the prior year's loss ratio. Turning to our Reinsurance segment. Gross written premiums for both the quarter and the year are flat compared to the same periods in 2019. In this quarter, we saw higher gross written premiums in our professional liability line due to favorable timing differences and favorable premium adjustments offset by lower premiums in our product line in our property line. And that is aligned with our strategy to reduce natural catastrophe volatility. For the year, we saw higher gross premiums and workers' compensation, driven by a large relationship, offset by lower premiums in our credit surety line, largely due to the timing of renewals. As we mentioned each quarter, significant volatility in gross premium volume can be expected in our Reinsurance segment due to individually significant deals and the timing of renewals. The combined ratio for the Reinsurance segment was 90% for the Q2 of 2020 compared to 96% last year. The 6 point decrease was primarily driven by both a lower loss ratio and expense ratio. The decrease in the loss ratio was primarily driven by improved results on our property product lines. The decrease in the expense ratio was driven by the benefit of higher earned premiums along with lower profit sharing expense. The combined ratio for the 1st 6 months for the Reinsurance segment was 102% versus 97% for the same period a year ago. The 5 point increase was driven by higher current accident year loss ratio due to $32,000,000 or 7 points of direct COVID-nineteen losses recorded in the Q1. That was partially offset by a lower expense ratio due to lower acquisition costs. Next, I'll touch on our program services and ILS operations. And as a reminder, amounts for our program services and ILS operations are reported within services and other revenue within our operating results. Starting with State National, gross written premium volume for State National program services operation was down on both a quarter year to date basis, driven by the runoff of 1 large program and the in force cancellation of another large program, which resulted in a one time unfavorable premium adjustment. As a reminder, almost all of State National's gross written premium is ceded. Seeding fee revenue was flat for the quarter the year. We saw improvement in our operating expenses for the quarter as a result of lower profit sharing expenses. Turning to our ILS operations. Our combined ILS operations have roughly 11.6 $1,000,000,000 in net assets under management as of June 30, 2020. Our Markel CATCo operations are continuing the orderly wind down process and have been successful at returning approximately $900,000,000 of investor capital during the 1st 6 months of the year. Revenues from our ILS operations increased 9% from the prior year's quarter and are up 4% for the year to date period, which is being driven by growth from our Nephila MGA operations. That growth is being partially offset by a reduction in management fees coming from both CATCo and Nephila as a result of lower AUM and a reduction in management fees charged on side pockets. Operating expenses from ILS decreased compared to the prior year, which is primarily due to fewer professional fees associated with the internal review at Markel CATCo, partially offset by continued startup costs associated with our retro ILS fund manager, Lodge Pine. The FILL expenses were in line with the prior year. I'll finish up with some market commentary. It's very clear we've entered a hard market for most insurance and reinsurance lines. Some of the factors driving the hard market are concerns around social inflation, historically low interest rates, recent financial market volatility, elevated recent natural catastrophe activity and significant uncertainties caused by the COVID-nineteen pandemic. And those include the potential for regulatory action or litigation that would expand the insurance industry's loss exposure. Areas most impacted and where rates are increasing the most and fastest are general liability, professional liability and property lines. However, with the exception of workers' comp, all lines are seeing some form of rate increase and or improvement in terms. With those lines that saw strengthening this time last year compounding rate increases currently. Most of our largest lines are now seeing double digit rate increases and that momentum appears sustainable. These rate increases are more than offsetting lower premium volume and classes hardest hit by the pandemic. As an example, our workers' compensation business and really any business focused on small businesses, which have been hard hit by the economic closures and disruptions, those are under pressure. Despite continued unprecedented uncertainty, we entered the second half of the year with optimism. Thank you for your time today. And now I'd like to turn it over to Tom. Thank you, Richie. I'm pleased to report to you that we experienced a meaningful rebound in our investment portfolio during the Q2. Equities rebounded 18% during the quarter following the 22% loss in the Q1 and now stand at negative 8.4% for the year to date. We continue to earn positive mark to market returns on our fixed income portfolio from lower levels of overall interest rates and essentially no credit losses given our longstanding commitment to very high credit quality. The total investment return for the portfolio after all expenses and foreign exchange effects was negative 0.3% for 2020 year to date. Investments always operate within the overall context of the Martell Corporation. Our investments support the capital base we need to operate our insurance businesses as well as to produce attractive total returns. We think that the current highest and best capital allocation decision we can make right now is to support the growth of our insurance operations. As witnessed in the Q2 results, insurance prices are going up and we are being paid more per unit of risk. 1st and foremost, writing more and better priced insurance business looks to us like the best use of capital at Markel right now. Given the current opportunity to grow our insurance premiums and the tough combination we experienced during the Q1 of negative returns on our equity portfolio and our underwriting operations as well as the effects on tangible capital from the early days of our acquisitions in Ventures and Insurance Linked Securities businesses, we decided to reduce our exposure to publicly traded equities during the market rally of the Q2. Those sales, along with the addition of the $600,000,000 of preferred equity but it's in excellent condition to take full advantage of current opportunities to grow our insurance operations and manage levels of uncertainty. Our individual equity purchase and sale decisions continue to be driven by our long standing 4 step process of looking for businesses with good returns on capital and not too much debt, run by managers with equal measures of talent and integrity, with reinvestment opportunities and capital discipline at fair prices. While the world is changing at a rapid pace, we believe those principles remain relevant and durable. We believe that the COVID-nineteen circumstances of 2020 in many cases reduced the long term profitability of several companies. We also think that the infusion of liquidity into financial markets by governments around the world altered the ability to invest in prices to compensate us for the risks involved. In many cases, we concluded that we'd rather write insurance at current prices and we acted accordingly. At June 30, following net sales of approximately $1,200,000,000 equity stood at $5,700,000,000 of market cap, which is 50 percent of our shareholders' equity of $11,400,000,000 Our cash short term and longer term fixed maturities stand at $16,600,000,000 We expect to continue to build the cash and fixed income balances to reflect the increased inflows of insurance premiums during this period of growth in insurance. That stance should serve to increase our investment options going forward. While uncertainty and volatility will likely continue to dominate the landscape, well priced insurance risks generate capital and future opportunities for all of Markel as the expected profitability gets recognized over time. We will revisit our allocation as our view of the risk reward balance changes in insurance, investments or ventures. For right now, look for us to continue to build our cash and fixed income balances until conditions change. On ventures, I'm extremely proud of the businesses and the way that they have adapted to the unprecedented swift and dramatic changes over the last few months. As Jeremy mentioned earlier, revenues totaled $1,200,000,000 during the first 6 months of 2020 compared to $1,100,000,000 in 2019. EBITDA totaled $173,000,000 compared to $160,000,000 in the previous year. Those results benefited from the inclusion of the SC Fire and Security last year and 1 month of results from Lansing Building Products. Even without those additions, I'm deeply encouraged by the results from Markel Ventures. In many cases, the Ventures' managers faced extreme conditions as a result of COVID-nineteen shutdowns and unprecedented changes in customer behavior and ordering patterns. Additionally, keeping our workforce safe in manufacturing and field service operations continues to require new procedures and challenges. I'm incredibly proud of how the people at Venture's companies adapted to serve their customers and each other throughout this time. Those challenges all continue and we are by no means out of the woods, but I think the performance of the businesses in 2020 stands as a testament to the value they bring to their customers. We do not anticipate any acquisitions in the Vintrus Group in the near term. We continue to think that the best current capital allocation decision is to support the growth and opportunity in our insurance business. We continue to believe that Markel continues to be served well by our diversified 3 engine strategy of building excellent insurance, investment and ventures operations. While COVID-nineteen created a whirling negative cluster that eliminated the normal benefits of diversification during the Q1, we're pleased to report rebounds and improvement to you this quarter. We look forward to future years when we get to use the word usual and abandon the word unprecedented and we appreciate your long term support and partnership as we get from here to there. With that, thank you very much and we'd now like to answer your questions. Operator, if you'd be so Our first question is from Mark Hughes from SunTrust. Go ahead. Thank you very much. Good morning. The ILS business, could you give us a sense of your outlook there in terms of assets and just overall activity? Yes, Mark, Richie here. I think the outlook is positive. I think we commented on the call last quarter that as the COVID-nineteen situation was unfolding as markets were becoming incredibly volatile, I think people's decisions on asset allocation, I think they were basically frozen. As things have rebounded, as there's been a little more calm in the markets, we have definitely seen an uptick in terms of conversations. People are getting more comfortable with doing their due diligence virtually as opposed to on-site. And so we're very hopeful that we will see additional mandates in terms of AUM in the second half of the year. So very feels very different today than it did back in March, April. And then in the insurance operation, the GL, you described that as a very good growth opportunity. There's been a I think you've expressed concerns about the social inflation, but you seem to be writing a lot of business and you had favorable development in the quarter. Is social inflation as much of an issue now in the GL line? Again, COVID-nineteen has changed just about every aspect of life. And I think we still have to give some time to see how COVID-nineteen impacts social inflation. But there's no doubt we were seeing social inflation before COVID started. I think there probably is some aspect of social inflation going on. How that plays out, I don't know. But given the level of rate increase well, given where our portfolio was and given the level of rate increases we are now seeing, I feel pretty comfortable that is running ahead of whatever we would be seeing in terms of social inflation. And then finally on workers' comp, there's been some discussion of maybe that stabilizing at some point in the near future here. How do you see that? Well, we were seeing some green shoots in May June, but obviously we've had hotspots developing. We've had some states considering and in some cases going backwards in terms of opening up. So I think we have to see what impact that has on the workers' comp line. What we have seen so far in terms of workers' comp is the impact of COVID-nineteen on the top line, I. E. Premium and people either COVID-nineteen claims. So COVID-nineteen claims. So our workers' comp has held up reasonably well, but I think it's going to face headwinds until the COVID-nineteen situation is better under control. How about pricing there and comp? Pricing, it's been down for several quarters because just the results have been so good in workers' comp. I think the pressure on pricing is moderating. It is probably still negative at this point, but I would say that pressure is moderating, but that's being offset to some extent by there's just less business out there. And we in particular, we focus on small business and obviously small businesses have been hit pretty hard by COVID-nineteen. Thank you. Our next question is from Jeff Smith from William Blair. Go ahead. Hi, thanks. Good morning. You'd mentioned the rate environment, obviously, really good seeing double digit rate increases in quite a few lines. Could you maybe just provide some more details, some numbers behind that and some of the highest growth lines? Well, some of the areas we're seeing the highest rates are and I think this is fairly consistent with what you've probably heard on other calls, general liability, casualty and professional liability are probably leading the pack. And we're seeing sort of solid mid teens in those two areas. Obviously, property that's approaching 20% sort of rates. We've been we're pretty flat in property, which means we've been getting rate increase, but we've actually been reducing exposure and that's been part of our plan to sort of reduce our nat cat volatility. We have always been big riders of professional and casualty and that is where we're seeing the biggest rating rate increases and I think that's why you're seeing us growing at the rate we're growing in the first half of the year. Okay. And then the EMS environment, I mean, it seems like, Lloyd's in particular could be hit more by the pandemic and they had already they had been pulling back AIG had been pulling back. Are you seeing even more dislocation there from the pandemic, more opportunities to grow? Yes, I think there is clearly dislocation. And in those three areas probably are the areas the prices are the highest there. So that would suggest that's the areas of highest level of dislocation, casualty, professional and property. It is obviously COVID-nineteen is part of it, but keep in mind things were moving in this direction even before COVID-nineteen as a result of social inflation and those other items that I talked about. But without a doubt, I mean, we're pretty big players over in London. We're obviously a very big player in E and S and we are seeing significant business increases in both of those areas. Okay. Were there any catastrophe losses in the quarter? Absolutely. We had catastrophe losses, but we would have termed those sort of an attritional nature, not big enough to call out, but we certainly did have some catastrophe losses. We also had and I'm just anticipating the question, riot civil commotion losses. Yes, we had some of those as well. At this point, again, we see those more in an attritional sort of nature and not big enough to call out specifically in our results. Okay. Thank you. Our next question is from John Fox from Fenimore Asset Management. Go ahead. Good morning, everyone. Richie, I was just going to ask you why you didn't have any protest or weather losses in the quarter, but I'll move on. What's the threshold on that for materiality where you disclose it? I mean, we don't have any specific number, John, but $10,000,000 to $20,000,000 I mean, we would want to see an event be larger than that before we would break it out in the numbers. I might interrupt, Richie, and say we would actually not want to see it at that larger than that. Yes, good point. Good point. Yes, dollars 10,000,000 to $20,000,000 it would need to get to that sort of level before we call it out in the results. So your accident year numbers include those losses and that's just kind of being in the insurance business, you didn't break it out? Exactly. If it hadn't been those things, it would have been something else. All the surprises in insurance are negative, someone once said. Tom, I'm remembering that Markel Ventures reports on a 1 quarter lag. Is that correct? 1 month lag. 1 month lag. 1 month lag. Okay. Right. So I was not correct. And so the economic environment of April May is in the June quarter. That's exactly right. And that's what I'm trying to convey. Some of those businesses are day 1 of stoppage, just that's a myocardial infarction. And their ability to adjust and adapt and recapture some business and get things rolling, I just stand in slight jolt amazement of what some of those managers have done. Well, that's great. Thank you. Thanks, Dan. And you can extend my thanks. I have a bigger picture question. I mean, I noticed what you did in the equity portfolio reading the Q last night. And I noticed in an environment of very strong reinsurance pricing that you're not writing a lot more premium. And so I just had the observation, it looks like they're derisking the company. And I'd like you to comment on that. And are you doing that because the great opportunities insurance, because over the last few years, the results have been quite volatile and you're trying to reduce that, the overall general environment with the virus. Can you just take all those things or maybe other things you're thinking about and comment on my observation? Sure. Well, to a large extent, I think you've answered your own question. All of those factors play into exactly what's going on. So first off, as we're reporting, you just take the 2nd quarter numbers on a standalone basis, they reported an 88. So given the ability to write insurance premium and get an 88 combined ratio, we want to do as much of that as we possibly can. And cash and fixed income types of investments are the kind of just the flavor of capital that rating agencies and regulators like the most when you're backing that sort of opportunity. So if we can write insurance at 88, we're spectacularly inclined to do so to the fullest extent possible. Secondly, in terms of the rate per unit of risk, which Richie used that phrase and I would use the exact same thing. When we look at the landscape of things we can do, again, the rate per unit of risk right now is best in the insurance world. So when we take the microscope and examine everything that we own, whether it's an equity or fixed income securities, we do have to compare it against the opportunity cost and the comparison of the other things we can do, and are acting, we think, logically as we follow that analysis. And then your point about sort of the results of the last years and some volatility. Within the insurance book itself, there are some lines which tend to be more volatile and some that tend to be less volatile. And if you're able to get an 88 on something that's less volatile rather than more volatile and more cat exposed, well, you'd want to do the stuff that's less volatile. So I think if our roles were reversed, John, you would go through the same sort of logic chain and make the same sort of decisions that we're making. Okay, great. And on $7,000,000,000 of tangible capital, including the preferred, I mean, you're writing at $0.50 on the dollar in terms of premium. I mean, what's the potential for that to increase? How much premium leverage do you think you could add? I think we can continue to grow. I mean, the market comments, we think this hard what we're seeing in terms of the market is sustainable. And our goal is to write as much of it as we possibly can. Bob Cox, who's on the call, who runs our insurance operations, he likes to say, every day that goes by is one day closer to the end of the hard market and we want to make sure we take advantage of every day. Right. Well, dollars 6,000,000,000 of earned at 8% underwriting profit would be very nice. So we're shooting for. Okay. And Richie, in ILS, are the expenses there at a level is that the run rate or are there still legal expenses in there or how should we think about that? Yes. The picture is still a bit muddied with the legal expenses from CATCo. Okay. But I can tell you, we are very optimistic in terms of our opportunity to raise capital into the second half of the year and even more so into 2021. And that there's tremendous leverage in that business. As we are able to add AUM, the expense base really does not have to move a lot. The great majority of that should drop to the bottom line. And that's what we're hoping for over the next 18 or so months. Okay, great. Thank you. Our next question is from Mark Dwelle from RBC. Go ahead. Yes, good morning. I have I guess I have 3 questions. First, Richie, you had talked about the COVID-nineteen charge that you took last quarter and that it had held up well and so forth in terms of the reserving practice. Could you I guess the question I'm going to ask is, are you still writing business in areas like event cancellation and some of the other lines that you referred to that were generating charges? And if so, what you might have done as far as terms and conditions, etcetera, in order to stay in those markets? We are writing very little event cancellation today. We put a moratorium on writing event when the COVID-nineteen situation broke. To the extent we write it going forward, it would have to have a communicable disease exclusion. But the likelihood is we will write considerably less of that business going forward. It was a fairly small line for us, but it had an outsized loss in this event. And we're trying to avoid those sorts of businesses, small businesses that create big losses. That's not what we want. In terms of property, we have always had, for the most part, virus exclusions and of course the way property policies are constructed, physical damage is required first. We have been reducing our property exposure, not so much because of COVID, but certainly COVID is in the mix. We've been reducing our property exposure to reduce the natural cat volatility that it brings. So of the lives that have been heavily exposed to COVID, we're writing less of those today. Okay, that's helpful. The second question is for Tom. It mainly relates to Ventures. They obviously had a very, very strong quarter. And so I'm going to ask for kind of an unprecedented piece of information from you. Could you share what portion of the revenues in the quarter came from recent acquisitions? I'm trying to triangulate kind of what the underlying run rate was on the ongoing businesses. And that's the reason I was asking. I'm looking at Jeremy as I answered the question. I think on a same store basis, so without Lansing or VSC in there, revenues were down about 14%. In the quarter. In the quarter, year over year and EBITDA was down about 7%, if I recall. I don't have that number. Anyway, so that's the rough gist of things. That's helpful. Thank you. And then the last question that I had, I mean you just commented to the last gentleman about the strong capital position and the ability to grow. But then you did a preferred offering in the quarter, fairly substantial. And I guess I was curious to just talk through why you chose a preferred offering and why you felt you needed capital at this particular point in time? Hey, Mark, it's Jeremy. A couple of thoughts there. So certainly to some extent that was to improve liquidity and capital position in the short term and adequately respond to some of the uncertainties that were existing in May relative to COVID-nineteen. Also though and we saw this kind of playing out in the Q2, we thought we'd be able to deploy capital into our insurance operations to take advantage of improving market conditions and opportunities that we are beginning to see in the specialty insurance marketplace. And some of that has kind of played out in the Q2 and obviously Richie was commenting on that a little bit earlier. With regards to the structure, I mean, we've looked at hybrid capital in the past. We felt that in May that was a good time to kind of add preferred stock to our capital structure. We recognize a number of peers across our industry have done similar in their capital structure. And we like the fact that it's treated as capital for rating agency purposes and accounting purposes. We were comfortable increasing the overall financial leverage, but we were focused on not kind of increasing, if you will, our debt leverage at the time. And I might add to Jeremy's point, he used the phrase we've looked at hybrid capital. In fact, we've used hybrid forms of capital several times over the course of the last 30 years. And the guiding principle there is oftentimes there's some distinctions between GAAP Financial Capital and what regulators look at and what rating agencies look at. And we always want to take care of the shareholders and protect the common equity to the extent possible. So you sort of have to respond to the situation, look at what specific kind of securities are available that meet the needs and give you the opportunity to refinance that or pay that back in some sort of identifiable timeframe that keeps the common equity and plain shareholders in the best possible position. I appreciate all the answers. Thank you. Our next question is from Phil Stefano from Deutsche Bank. Go ahead. Yes, thanks and good morning. I guess just following up on the prior question with the unprecedented information on the acquisition and ventures. Is there a way we can think about the potential forward impact to these acquisitions? And to help us kind of lay out what the expectations are for the underlying businesses versus benefit that we have from these acquisitions coming online? Sure. Well, in economic senses, we always think that we're going to make double digit returns on capital when we lay out a dollar of capital in the form of an acquisition. So that's the way we underwrite them and that would be what I would lay out there is the longer term. The short term, there could be all kind of volatility around that. I would report to you that so far, again, I'm just very impressed and very grateful in the way that the managers of this business continue to operate them in wildly fluctuating circumstances. So I think the reports of the 1st 6 months where those companies are operating in the black, producing cash flows. Who knows what we wake up to any given day, but they're doing pretty well. And I would not want to put too fine a point or have a modelable kind of number for the next this quarter or 2. We don't do expectations or forward guidance in that sense. Yes, we're at the shot. Looking at the underwriting businesses, it feels like there's a growing expectation and maybe at this point even a frustration in some respects that we're getting this headline pricing increases. But it feels like loss cost expectations are increasing as well and we're just we're not getting underlying or attritional loss ratio improvements that I think people had been hoping for. How can we think about loss cost trends versus pricing over a period of time and the dynamics we have today versus the dynamics of 5 years ago and what that could mean for attritional underwriting margins as we look over the next couple of quarters or years? That's an interesting one. Let me I'll try it, Phil. I'd said that it's a little difficult to put your finger on what social inflation is doing right now because of all the COVID issues what's happened in the economy. I think that has muddied the waters there. I do believe in terms of pricing that is happening right now, I believe we're starting to create a margin against any sort of reasonable expectation of social inflation. When we start hitting mid teens in terms of price increases and that's coming on and we're now to a point where that's compounding on some price increases that we received in 2019. I have to believe just based on what we've seen in terms of social inflation in the past, because it's nothing new, that that is creating some margin against that. So my hope would be as if this is a sustainable market for a while, I think we should be able to create some additional margin against social inflation and hopefully see those attritional loss ratios bump down a bit. Tom likes to say, hey, this quarter we're that's 1 quarter in a row. So we've got 1 quarter in a row. We're going to see if we can make it 2 quarters in a row next quarter. Got it. And then the last one for me, and I apologize if I missed it earlier. Any updates on Lodge Pine and how the fundraising is going there? Again, we got a lot of I kind of said in the Q1 up through about May, I think most investors were pretty frozen trying to kind of assess what had happened to their portfolios. We have seen a significant change in tone and the amount of conversations and the amount of due diligence that's going on is picking up. That book is a oneone book largely. It's a January 1 book. And so quite honestly, people aren't going to make their decisions until probably into the fall as to whether they want to invest. We're having some great conversations, but I think just the way the calendar works, we're not going to have signed commitments until sometime in the fall. Okay, got it. Thank you. Our next question is from Mark Hughes from SunTrust. Go ahead. Just a couple of quick ones. Any comments on the medical professional liability line? Mark, we used to be that used to be a really big part of what we did and just that market has been challenged for a number of years. And so it's become a much smaller part of what we do. But as I said, most lines are improving and there are certainly improvement in the health lines, the broader health lines. And we're taking advantage of that. But the base we're starting with is much smaller than it was several years ago because of that challenged environment. And then when we think about your new business through the quarter, you're up 14% in insurance and written premium. Was that more weighted to the back part of the quarter? And is that more of a better run rate on a go forward basis? It's been relatively consistent in sort of that mid teens, 1st and second quarter. Whether we've seen all of the impact of COVID-nineteen, your guess is as good as mine. It certainly hurt our smaller businesses, but that's been more than made up for by price increases and more business coming into both E and S and London. So that sort of mid teens is that seems to be the run rate through the 1st 6 months. Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Tom Gayner for closing remarks. Thank you very much for joining us. Thank you for your support. We look forward to talking with you again next quarter. Thank you.